IntroductionDuring the Dot-com “bubble”, internet firms were highly valued compared to “old economy” firms. Internet firms’ stock prices were unrealistically high. Most of those firms were operating under loses and no tangible assets to warrant those prices. Analysts justified those prices and recommended buy ratings but later a crash followed. Article Summary

This article explains the relationship between intangible assets (advertising and R&D) expenditures and internet firms’ market value during 1996-2000.The author presents two opinions in regard to internet stock’s valuation. The first theory is based on DCF methodology and asserts that due to poor earnings and low earnings visibility, internet stocks were irrationally overvalued in 1999. Secondly, based on the option pricing theory, it can be justified that the prices were warranted due to growth of those firms and volatility as primary value drivers. The article details five literature reviews on valuation – (1) Investment opportunity approach to valuation and more especially growth firms, (2) The life cycle theory, (3) The effects of intangible assets (R&D and advertisement) to market value, and (4) Valuation of internet firms using real options. Based on the life cycle theory, as the firm grows and matures, managers have a tendency to pursue growth rather than stockholders’ welfare. Those with comparative advantage over the competition tend to invest more in the growth stage to expand their operations. Under this theory, the value of the firm is divided into: (1) option value of growth opportunity, (2) present value of cash flows from asset-in-place. This model is based on the idea that the firm’s life cycle determines its expected returns. Expected return attributable to each component of value largely depends on the growth stage of the firm. Like in “old economy” firms, mature firms have all of their value in the present value of cash flows from the asset-in-place component while growth firms, their value is concentrated in the growth component. The author argues that intangible assets (i.e. advertising and R&D) greatly add value and since their benefits are mainly realized in the future, they should be capitalized rather than expensed. They positively impact the value of the market as they give some signals of future profitability. Therefore, increase in these assets has consistent effects on profits. The author points out that the market reacts more favorably to high-tech firms when R&D expenditures are announced than to low-tech firms. This is based on the hypothesis High-tech firms have promising growth opportunities whereby investments in R&D positively affect the market value. On the other hand, Investments in low-tech firms negatively affect the value due to no or negative growth opportunities. The author also points out that the efficient market does not capture advertising and R&D in the firm’s stock price because these investments are expensed rather than capitalized and therefore reduce the profits making the financial statements to be misstated. It may be possible that R&D intensive firms may be underpriced because investors focus on accounting information failing to see the future benefits of the R&D investments. On the other hand, especially for those firms with negative earnings, overconfidence investors will overestimate the future benefits from R&D investments thus causing overvaluation. Maintaining R&D and advertising intensity provides the positive signal that management are overconfident in future prospects and the market tend to overlook those signals making it possible to realize abnormal returns. The author also explains the real option valuation model which he blames on the high valuation of internet stocks during the bubble...

YOU MAY ALSO FIND THESE DOCUMENTS HELPFUL

...Bubble-ology
I.Introduction
Everybody loves bubbles! But what makes bubbles form, and float up in the air until they pop?
A soap bubble
The secret to a good bubble is something called surface tension, an invisible bond that holds water molecules together. Water is a polar molecule, so it has plus and minus ends just like magnets that attract each other. When the water molecules align with each other they stick together, creating surface tension.
You might think that it is the surface tension of the water that holds the skin of a bubble together. Actually, the surface tension of water is too strong to make a bubble. You can try yourself to blow a bubble with plain old water, it just won't work! A good bubble solution has a detergent added to it to relax the surface tension of the water, allowing it to have more elastic, stretchy properties. Now it can act more like the skin of a balloon, stretching out nice and thin, trapping air inside of the bubble like a liquid balloon.
II. Review of Related
Abstract
Making your own bubble solution is fun, but sometimes the bubbles don't seem to work as well as the solutions you buy in the store. In this experiment you can test if adding corn syrup or glycerin to your bubble solution will make it just as good as the stuff you can buy. This...

...of the World Wide Web in the beginning of 1990s. The progress of browsers in the early 1990s which facilitated web pages to be viewed in a graphical format in color after that brought the benefits of the Internet to a wider community. The World Wide Web was to develop at an exponential rate together in terms of the number of websites as well as users as shown in Figures 1. This changed some in the business community to its potential as a means of communication also as a sales and marketing channel.
Thus the notion of the "New Economy" has been hit hard since the "dot.com" bubble burst in early 2000. NASDAQ, the high-tech stock index, shortly after soaring to slightly over 5,000 in the first quarter of 2000, dropped precipitously in the second and the third quarters of 2000, continuing its downward trend through 2002 to roughly one-fifth its peak value. But the problem ran deeper than the failure of most dot.coms to make a profit. The hype around the Internet during the late 1990s included a widely accepted statistic that Internet traffic was doubling every three months. Analysts estimate that Internet traffic actually grew at a rate closer to 100 percent a year. (Marc J. Epstein, 2004)
This is still hefty by most standards, but nowhere near the volume that led more than a dozen companies to build expensive fiber-optic networks, most of which remain unused. Millions of miles of fiber-optic lines were buried beneath streets and...

...1. What is financial bubble?
Financial bubble is also known as economic bubble which means the price of goods, services, stocks increases dramatically to an unreasonable or unstable price level. Specifically, this issue usually happens in stock market, real estate and other business fields (Fraine 2010). There are many kinds of bubbles which occurred in countries in the world such as Tulip Bubble in Netherlands (1634 - 1637), South Sea bubble (1711 - 1720), and Dot Com bubble in America (1995 - 2000) which is predicted that it is appearing at the moment, etc (Vivaldi 2011). (See appendix 8.1)
When talking about bubble, everyone will think about something which is easy to get big and fragile. Thus, the situation also appears when investors always expect the price is too high in order to get more profit and after that, the price decreases suddenly (Vivaldi 2011). It makes the bubble they are creating broken easily. Therefore, financial bubble market is considered as an economic cycle that has three periods including recession, recovery, and development (‘Economic Bubbles: Understanding the role of bubbles in an economy’ 2008). The economy is developing in the short period and quickly goes down.
2. Why and how do financial bubbles happen?
There are so many reasons that economists...

...﻿1. For this question regarding bubbles, you can pursue one of the following two suggested angles or perhaps some combination of the two, for example by using the Irish real estate experience to critique the Minsky model. First, you can consider bubbles in a general, abstract theoretical sense without trying to explain any particular actual episode in some asset market. Such a theoretical analysis should consider both rational and behavioural aspects of various individuals’ investment tactics that contribute to the aggregate market phenomena that we associate with bubbles. Describe and critique the Minsky model of speculative bubbles. In the context of that model, at what stages are individuals behaving rationally, and at what stages does their behaviour display one or another behavioural bias? Consider the strengths and weaknesses of the model vis-a-vis orthodox economic models of bubbles. Describe a few institutional factors that create positive feedback in the stock market, both as prices are going up and as they are going down, independently of any behavioural biases.
2. The second angle you can take concerning bubbles is to analyse a particular bubble, for which the experience of Ireland over the last decade suggests itself. In this regard, the promised “soft landing” has not come to pass, and there is now a consensus that Ireland is indeed suffering the...

...﻿
INVESTMENT OPPORTUNITIES DURING STOCK PRICE BUBBLES
Table of contents
1. Introduction……………………………………………………………………………………
2. The movements of stock prices………………………………………………………………..
3. The existence of stock price bubbles…………………………………………………………..
4. The limitations to arbitrage…………………………………………………………………….
5. Heterogeneities among rational arbitrageurs................................................................................
6. Stock bubble trading and exit strategies………………………………………………………...
7. Conclusion………………………………………………………………………………………
References……………………………………………………………………………………….
1. Introduction
Interesting thoughts have been released on how investors should trade with stock movements. The dynamics of modern trading strategies are primarily based on one of the most important studies ever written in financial management: Technical analysis on stock trends by Robert D. Edwards and John Magee. Their work emphasized techniques that could be used to identify stock patterns in order to predict future stock prices. The introduction of technical analysis went beyond fundamental analysis that focused completely on financial statement analysis. One of the implications of the new method implied that stock prices moved within a certain range around its true, fundamental value. This concept...

...BUBBLES
…As the cool air whiff to my face, I can’t resist closing my eyes and pretending to fall into deep asleep, to fade all the pains and emptiness brought about my consciousness. But the sounds of the bird chirping and the touch of the cold bench where I am sitted made me realize that it is still a wee time since I got up from my bed. The moment I open my eyes, the intense feeling of loneliness filled my whole being as the tiny bubbles blown out in the air. Wondering where it came from, I concluded that it was from the children playing around the park. As the thing blows incessantly above, my mind takes a glimpse of the past…
I was sitted in the same bench, where my face wears the trace of whole night tears. I feel so sad and alone then, and nobody cares. I did not realize that I’m crying again when tears cross my cheeks. ”What’s wrong?” a husky voice reaches my ears. I looked up to see the owner of the voice. I can’t remember if I was just imagining when I saw love and concerned in his dark eyes. I’m still reluctant to take the handkerchief he was offering, until he gave an assuring and a friendly smile. I took the hanky and utter a thank. He sitted beside me. At first, I find it hard to talk things with him because of the fact that I don't know him, but i set aside my doubt when i saw no hesitancy in his face and as if comfortably talking to me…a stranger. I did not notice the time passed by until the man stand and said...

...Introduction
The Mississippi Bubble, that took place in France in 1717, has been compared to the subprime crisis that began in 2006 in the United States. The similarities between the two crises were not actually noticed until after the subprime crisis had begun. The similarities are present in the development, policy responses, and the roles that each government played. Could these two crises that occurred more than 300 years apart be so similar that with a proper analysis of the Mississippi Bubble have helped in any way with the subprime crisis? It is said that history repeats itself, so did the economic crises from 1717 reoccur in 2006? Before being able to denote the similarities a thorough understanding of the two must exist.
The Mississippi Bubble
The Mississippi Bubble was a direct result of a scheme to make the French colonies in America and Canada look wealthier than they actually were between the years of 1717 and the end of 1720. The bubble was originated by the Mississippi Company, a French trading company, which was developed by John Law. Law’s company was developed in 1717 and quickly became a monopoly on trade rights with these colonies (Your Dictionary, no date).
The Mississippi Company held trading privileges to the French territories along the Mississippi River for twenty-five years (Jon Moen, 2001). Terms for this deal included that the company was required to have 6,000...

...1- The term dot.com
The term Dot COM (English .com) appeared before the explosion of bubble Internet to indicate, the madness which seized the “entreprenautes” to the evocation of three sesames of the E-trade: market, customers and Internet. A synonym of E-business.
2- The Internet Bubble
The "dot-com bubble" sometimes referred to as the "I.T. bubble" was a speculative bubble covering roughly 1995–2001 with its peak on March 10, 2000 with the NASDAQ peaking at 5132.52 during which stock markets in Western countries saw their value increase rapidly from growth in the new Internet sector and related fields.
The period was marked by the founding and, in many cases, spectacular failure of a group of new Internet-based companies commonly referred to as dot-coms. A combination of rapidly increasing stock prices, individual speculation in stocks, and widely available venture capital created an exuberant environment in which many of these businesses dismissed standard business models, focusing on increasing market share at the expense of the bottom line.
2- The growth of the dot.combubble
The venture capitalists saw record-setting rises in stock valuations of dot-com companies, and therefore moved faster and with less caution than usual, choosing to mitigate the risk by starting many contenders and letting the market decide which would succeed. The low...